U.S. Funds Are Conquering Europe
Heide Wagener used to invest in the same way as most other middle-class Germans, by putting money in bond funds sold over the counter at her local bank. But in January, the 50-year-old hotel owner decided to try something different. Her financial adviser suggested buying shares in a Luxembourg-based equity mutual fund run by Alliance Capital Management Holding of New York. "I had never thought of saving through an American institution," she says. "But my adviser thought it was time I moved some money out of bonds into equities. And he was impressed by Alliance's track record, solid reputation, and transparent fee structure."
These days, such switches are becoming common. Hungry for the fatter returns and lower charges of U.S. mutual funds, millions of European investors are doing the same. American funds have pulled in more than $120 billion from the 15 European Union countries during the past four years. That's almost 8% of the $1.5 trillion European mutual-fund market. Five years ago, American funds couldn't claim 3%. In many ways, Europe looks much like the U.S. of the early 1990s--a savings market with huge potential, primed to take off. Mutual funds account for just 10% of investments in Europe, compared with 23% in the U.S.
BIG REWARDS. The parallels aren't lost on Fidelity, Alliance, and Vanguard, all of which have high hopes of growing as fast in Europe as they did in the U.S. "There are huge opportunities in Europe," says Kurt Schoknecht, senior vice-president of ACM Offshore, which is spearheading Alliance's European push. "One of our prime strategic goals is to make sure we benefit from them."
There's plenty to go for. With interest rates on European government bonds at three-decade lows, savers are looking for decent returns from equities. Large-scale privatization has accelerated the trend: Investing in companies seems less risky to first-timers. Meanwhile, the euro has eliminated most exchange-rate worries. What's more, Europeans are beginning to doubt they'll ever get comfortable state pensions. As a result, people are not only saving more, they're also investing more. Italy, where interest rates have fallen most sharply, may be the world's fastest-growing mutual-fund market. In the past three years, fund assets there have more than tripled, to $475 billion. Last year, France's market for such funds was second only to that of the U.S.
The easiest market to attack is, of course, institutions. Pension funds, insurance companies, private banks, and endowments have been eager buyers of special funds set up mainly in tax-efficient Luxembourg and Dublin. The institutions either invest in these funds on their own account or rebrand them for sale--in a process known as white labeling--to their own customers. Vanguard, best known in the U.S. for its retail prowess, targets only institutions in Europe.
U.S. firms are also attacking the retail market, even though it is dominated by local banks. They have the brands, the distribution channels, and customer contacts. And they have established relationships with the independent financial advisers to whom Europeans such as Wagener often turn. Plus the U.S. houses sometimes just get it wrong. In 1998, for example, Morgan Stanley Dean Witter Investment Management blitzed British investors with ads for "no-load" funds. Fine--except the Brits didn't know what that meant.
"WHOLE HOG." Now, however, U.S. firms have learned from their own mistakes and are tailoring their ad campaigns to local audiences. And more European banks are recognizing that their core competence is distribution--so they're ready to sell U.S. firms' products in exchange for a commission. Alliance, now owned by France's AXA, has forged links with German investment consultants and with Eptaconsors, a consortium of six Italian banks. Besides, as retail clients' interest in cross-border investing has grown, they are more willing to entrust their savings to foreign fund managers. "Once [investors] decide to go outside their home market, they are as likely to go the whole hog and choose a U.S. firm as opting for one from another European country," says Philip Glaze, a senior adviser in the London office of Frank Russell Co., a pension-fund consulting firm.
At the same time, the surge in online banking will make it easier and cheaper for clients such as Wagener to buy U.S. funds. Money-management specialists expect that up to 15% of all mutual funds will be distributed online within five years. PaineWebber Inc., for example, is negotiating to distribute its investment products through first-e, an Internet bank based in Dublin. "Whatever their approach, the Americans could do in money management what they did in investment banking--take Europe by storm," says Elias Dinenis, the head of City University of New York's department of investment. "No wonder the local firms are worried."
For now, at least, the Americans have some powerful competitive advantages on both the institutional and retail fronts. Because they are usually larger and can reap economies of scale, their costs are lower. The management fees that U.S. mutual funds charge institutional clients are rarely more than one-half a percentage point, whereas European houses often charge twice as much or more. Britain's Financial Services Authority estimates that British mutual funds eat up nearly one-third of a retail investor's contribution in fees. The figure for U.S. funds is less than one-fifth. In addition, U.S. funds are usually much clearer in disclosing their charges than European rivals are required to be.
And simply put, American fund managers often have more expertise at this point. Fidelity and its compatriots place far more emphasis on research than most European money managers do. They tend to know more about pan-European investing than do their European rivals, because they have traditionally treated the Continent as a single market. The Americans also have more money to spend on top-flight staff. "They hire ex-McKinsey consultants and their ilk," says a money management consultant. "Few European fund managers have the wherewithal to do that."
BOTTOM-UP. What's more, the Yanks are benefiting from a sea change in the way Europeans choose money managers. Professional investors have moved away from the traditional top-down approach, focusing primarily on interest rates and other macroeconomic factors when making investment decisions. Now the bottom-up approach--focusing on stock selection and favored by most U.S. money managers--is in vogue.
Still, the Europeans aren't giving up without a fight. Seasoned observers say that many local fund managers have been reviewing their fee structures with a view to paring them, redoubling their marketing efforts, and improving the quality of their service. "U.S. competition is forcing the locals to become more professional," says Dinenis. Indeed, just as the U.S. houses are invading Europe, the Europeans are targeting America: Zurich Financial Services, Allianz Group, Barclays Global Investors, and Dresdner Bank have all made major money-management acquisitions in the U.S. in recent years. But, that's often because they want to bring American knowhow back home.